With military tensions in the Middle East flaring again following the accident involving a Korean ship in the Strait of Hormuz and Iran's attack on oil facilities in the United Arab Emirates (UAE), global financial markets are swinging. After the ceasefire, international oil prices, which had fallen below $100, have climbed back above $100, and U.S. Treasury yields have also surged. As the uncertainty of war persists, there are concerns that inflation will be pushed higher while production, investment, and consumer sentiment could be curbed simultaneously.

On the 4th (local time), as the conflict in the Strait of Hormuz intensified with the launch of the U.S. Project Freedom and a fire on the cargo ship Namu-ho operated by Korean shipping company HMM, international oil prices jumped and financial markets weakened.

On the London ICE Futures Exchange that day, Brent crude futures settled at $114.44 per barrel, up 5.8% from the previous session, the third-highest close of the year. West Texas Intermediate (WTI) also finished up 4.39% at $106.42, topping $105.

After the United States and Iran reached a ceasefire early last month, Brent fell to $90.38 on April 17 and WTI to $83.85, but since the 29th, when the United States announced a maritime blockade of Iran, expectations of a forceful response have mounted and oil prices have surged.

As inflation jitters and concerns over rate hikes spread, the 30-year U.S. Treasury yield topped 5%, the highest since last July. Rising Treasury yields mean falling bond prices. In turn, the three major U.S. stock indexes all closed lower, gold weakened, and the dollar strengthened.

The Korean economy, which depends on Middle Eastern crude for 70.7% of its oil imports, can hardly be at ease.

When oil prices rise, logistics costs increase, and war paralyzes raw-material supply chains, adding a triple blow that intensifies inflationary pressure. Price gains are spreading, especially among products with high dependence on imported raw materials.

Domestic gasoline prices still exceed 2,000 won. According to Opinet, the Korea National Oil Corporation's fuel price information site, on the 5th the average gasoline price in Seoul was 2,051.74 won per liter. The producer price index, which reflects wholesale prices, climbed 1.6% in March from the previous month to 125.24, the sharpest increase in four years since the Russia-Ukraine war began. The International Monetary Fund (IMF) also raised its forecast for Korea's inflation this year from 1.8% to 2.5%.

There are also concerns that consumer sentiment could deteriorate. The Bank of Korea's Consumer Sentiment Index, which had risen for two consecutive months in January and February, fell 5.1 points in March to 107.0 as the blockade of the Strait of Hormuz became a reality. The Business Sentiment Outlook Index, which reflects corporate expectations, also fell 4.5 points to 93.1. The Ministry of Finance and Economy projected that the decline in the Consumer Sentiment Index would negatively affect retail sales (an indicator of goods sales).

With military tensions around the Strait of Hormuz continuing for more than two months, worries about stagflation are being raised with caution. As price increases that began at the production stage spread to consumer prices, a domino effect could emerge in which production, investment, and employment all slow.

In a regular report the previous day, Lee Eun-jae, associate research fellow at the International Finance Center, said that stagflationary pressures are rising worldwide, that the possibility of price corrections across global asset markets, including the bond market that has underestimated the impact of the war, has also increased, and projected that surging energy prices will begin to inflict real-sector damage, especially in emerging economies.

The Ministry of Finance and Economy also assessed in its April economic trends report that there are concerns about increasing burdens on livelihoods due to downside risks to the economy stemming from heightened tensions in the Middle East, greater price volatility from rising international oil prices, and a weakening of consumer and corporate sentiment.

Yang Jun-seok, an economics professor at the Catholic University, said that to stabilize consumption, uncertainty about the future needs to be resolved, but that is difficult to expect in wartime, and added that the government should focus on securing raw materials and oil supplies as stably as possible to reduce uncertainty.